The debt snowball method
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So I am sure that you have heard of the debt snowball method from the financial genius Dave Ramsey.
If not, allow me to give you a brief overview of what it is and how you can use it to pay off your debts!
If you are serious about paying off your debts and living a financially peaceful life, keep reading!
What in the world is a debt snowball?
In Dave Ramsey’s book, The Total Money Makeover he talks about 7 baby steps to paying off your debt and achieving financial bliss. The debt snowball is one of them. The debt snowball, in essence, is the prioritization of your debts from the smallest to the largest (you get the snowball reference now?). You start off with a certain amount that you can budget each month to pay off your debts. Whatever works for you. There is also a handy workbook to help you as you read through the book and keep you on track, which you can check out here!
You take all of your balances and pay the minimums, except the one with the lowest balance. That one you pay more to pay it off the quickest.
Once you have the smallest debt paid off, then you apply the balance you were paying on that one to the next smallest balance. You keep going in this fashion until off of your debts are paid off.
Using the debt snowball method you achieve a quick win, so to speak. If you have a debt with a lower balance and you see that you can fully pay it off, it will give you the satisfaction and motivation to keep going!
You are also focusing on using the extra money you have budgeted towards paying your debt off quicker. Otherwise, you end up spreading yourself thin and feel like you aren’t even making a dent in paying down your debts.
When you are achieving quick wins, you will be more likely to stick with whatever it is you are trying to do.
Think of it like losing weight. When you lose that first 5 or 10 pounds and you can see a change in the way you look and feel, that gives you the motivation to keep going.
Same thing with your debts. If you have a credit card with a $500 balance that you feel like you have been paying on FOREVER, wouldn’t it be great if you could pay it off in a few months and be done with it? Well Duh!
What if my budget doesn’t allow me to do this?
Well, when was the last time you really evaluated your budget? Be honest! If you haven’t already read the How to Stop Living Paycheck to Paycheck without Losing Your Sanity post, go read that first. Go ahead, I’ll wait…
Ok, now back to your concern about not having enough in your budget. Do you think you have enough now? There are always ways to cut expenses here and there. Whether it is not going out to eat or dropping that gym membership that you never use.
Take a good long look at where your money goes every month. Take a look at your bank statements, you might be horrendously surprised! When I first did this I had no Idea how much my husband was sending as the gas station on his “lunches” every week!
When you get lazy with your budget, things can start to add up really quickly.When you get lazy with your budget, things can start to add up really quickly. Click To Tweet
So after your done crying over your bank statement, start cutting things out. Make sure everyone is on board. Eating out and entertainment costs are a great place to start.
Make sure you are really concentrating on your goals of paying off your debts when you do this. Don’t feel like you have to become a hermit just to become debt free. Try making a visual that you can keep with you or in plain sight as a reminder of your financial freedom goals. You know, like those giant thermometers that you see when people are fundraising.
After you are good with sticking to your new budget and have realized that it is not as bad as you thought it was going to be, take the next step.
Find out where you can MAKE extra money. Try the good old fashioned garage sale! I personally hate having garage sales, I make my husband do them 🙂 I don’t mind however posting items I want to get rid of on the Facebook buy/sell sites, eBay, or Craigslist. There have been times I have put things on Facebook and 5 minutes later someone is buying it!
*a side note about selling things online that are not shipped-meet in a public location, like a high traffic gas station or even in the police station parking lot. Don’t give out personal info, like your address. I have personally done this a few times, but it was for very large items that I couldn’t haul and I always made sure my husband was home at the time the person was picking up. Just be aware of stranger danger-people are shady and I have heard way too many horror stories!
Now back to your debt…
Take any extra money you make from this and pay it towards your first debt. I doesn’t matter if it’s $5 or $500, every dollar counts here!
Once your first (lowest balance) debt is paid off, move on to the next one with the lowest balance. Let’s make sure we are on the same page here:
Debt #1-paid minimum and used all extra income to pay off
Debt #2-paid minimum until debt #1 is paid off
Now everything that was being paid on debt #1 is not being paid on debt #2
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You will keep doing this until all of your debt is paid off.
I made a fancy little chart to show you how this works. Keep in mind that this does not take into account any interest paid on the balances. If you want to figure it out yourself with your balances and interest rate-check out the debt payoff calendar from CreditKarma. You can read my in-depth review of this awesome FREE app/website here.
In the example outlined below, there are 5 different debts, and you are paying a total of $200 each month to pay them off. Obviously, everyone’s situation is different and your debts will look different than what I have outlined here. This is just an outline to help wrap your mind around how you will be paying off your debts.
In this example, the total amount of debt of $4,000 is being paid off in 20 months, not too bad 🙂
If you are consistent and stick with it, using the debt snowball method to pay off your debts can be extremely effective.
I had a friend who did this and then purchased her next vehicle in cash (a rather nice Escalade I might add). The debt snowball method can be used for any type of debt: credit cards, medical, home and auto loans, and student loans.
Why not just pay the minimums and keep my “extra” money?
“I love living paycheck to paycheck and never being able to do anything!” You say that all the time right? Probably not, nor does anyone else. Let’s get real here people, it sucks!
Once you start digging yourself out of that hole, you are going to want to keep digging. Debt is not fun. Having those looming monthly payments every month is not fun. Paying late fees when you forget to pay those monthly payments are not fun.
But you know what is fun?
Being able to go grocery shopping without having to check how much money you have cuz you just paid all your bills. Being able to take a vacation without having to wait for your tax rebate. Never having to tell your kids they can’t do something because you can’t afford it.
Living paycheck to paycheck without having any wiggle room is hard! It’s downright shitty!
When you have paid off your debts you no longer have to worry about “making ends meet” (which I never understood that saying until I knew what it was to live paycheck to paycheck).
You are able to provide things for your family without any help or the weight of the world sitting on your shoulders.
I used to have the worst luck. We would literally have no money in our bank account and something would happen. Like the time an 11-inch steel rod ruined my tire and it cost a few hundred dollars to get a new tire and rim. Oh, what’s that? We need to apply for another credit card just to fix the car so I can drive the kids to school? Awesome! NOT!
Don’t keep putting yourself in these types of situations.Don't keep putting yourself in dire financial situations, preparing is easier than reacting! Click To Tweet
Work towards paying off your debts and building up your emergency funds. That way when something happens, you are prepared and don’t have to borrow money from anyone!
What is that quote about insanity-doing the same thing over and over and expecting different results?
You need to start by taking the first step and get control of your budget. Once you have gotten this under control you can start with your lowest balance debt and chip away at it with your “extra” cash.
Just like with your shampoo, rinse and repeat!
Every debt you pay off will get you closer to your goals of financial freedom. All while creating stability in your financial situation.
The Beginner's Guide: The Debt Snowball Method
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